Moral Obligation for PawSox Funding is the Same as 38 Studios Legislation

If you thought the financing scheme that forced Rhode Island to pay-off the bonds for the 38 Studios guarantee loan bonds could never happen again it Rhode Island, guess again.

The legislation now pending before the Rhode Island legislature that would fund the $83 million for the privately owned Pawtucket Red Sox sports team has the same provision that forced the state of Rhode Island to pay-off the $75 million in bonds after Curt Schilling's 38 Studios went bankrupt.

Moral Obligation, Back Again

In May of 2014, right after now-Speaker of the House Nick Mattiello took office after the resignation of Gordon Fox, Mattiello and his Majority Leader John DeSimone traveled to New York City and met with Moody’s and Standard and Poor’s — the two largest rating agencies. Mattiello and DeSimone were told if Rhode Island did not stand behind the state’s moral obligation it would be more expensive and more difficult to borrow in the future.

A day after Mattiello and DeSimone’s trip, they told the House Democratic Caucus that RI had to pay-off the bonds.

A GoLocal review of the provision of the 2010 RI General Law that created the guarantee loan program 38 Studios and the now pending legislation to fund the Pawtucket Red Sox Stadium shows that in both cases Rhode Island taxpayers will ultimately have the full obligation to pay off the bonds.

Former Director of Administration Gary Sasse weighed in on the PawSox financing scheme, following his appearance on Business Monday on GoLocal.

"I'm askance anytime government uses moral obligations -- in practice, it becomes a financial obligation," said Sasse. "Out of an abundance of caution, I'd advise against using moral obligation again."

Sasse noted that he believes the use of state funds for a local authority -- in this case, the Pawtucket Redevelopment Agency -- should constitutionally require a 2/3 vote by the General Assembly, similar to the budget.

However, Sasse said that even that, he believed, is not at the root of the issue.

"I think the question...should be it a vote of the people?," said Sasse, of putting the PawSox on the ballot as a bond referendum. "I believe it should."

Revisiting 38 Studios -- READ SJ ADVISOR'S REPORT BELOW

A report commissioned by the State of Rhode Island at the time of consideration conducted by SJ Advisors, LLC strong recommended that the state pay off the bonds, “If the General Assembly does not appropriate funds for debt service, we expect the state’s bond ratings will be downgraded below investment grade, which will increase interest rates that the state pays for future bond issues for some period of time.”

The report, in summary, stated, “The state put its moral obligation on the 38 Studios Bonds. In retrospect, this was clearly a poor decision since the promise of employment was short-lived, and the cost to the state, whether or not it chooses to honor its moral obligation, will be significant.”

The Report concluded, “By voting to approve the payment of these bonds, the message the market will take is that Rhode Island will stand by its moral obligations, and by extension, its legal obligations, thereby enabling the state to maintain its strong credit rating and access to low-cost borrowing. A vote to approve payment would be, even if with regret, a rational response to the cost-benefit analysis provided.”

The PawSox funding legislation is nearly identical to 38 Studios -- it states the Pawtucket Redevelopment Agency shall ask the Governor to provide financing via the state budget. But, Governor can request and only the General Assembly can appropriate.

"In order further to assure the continued operation and solvency of the corporation for the carrying out its corporate purposes, the executive director shall annually, on or before December first, make and deliver to the governor a certificate stating the sum, if any, required to restore each capital reserve fund to the minimum capital reserve fund requirement for the fund. During each January session of the general assembly, the governor shall submit to the general assembly printed copies of the budget including the total of the sums, if any, as part of the governor's budget required to restore each capital reserve fund tot he minimum capital reserve fund requirement for the fund. All sums appropriated by the general assembly for the purpose, and paid tot he corporation, if any, shall be deposited by the corporation in the applicable capital reserve fund."

The PawSox legislation reads in part:

RESOLVED and ENACTED, That the Pawtucket Redevelopment Agency shall request 18 the Governor to include in the State budget for each of the fiscal years during which any Series B 19 Bonds or any Series C Bonds are outstanding, amounts equal to the projected annual debt service 20 on the Series B Bonds and Series C Bonds; and be it further

RESOLVED and ENACTED, That the State Director of the Department of Administration and the Governor shall enter into, execute, and deliver the Series B Payment

Agreement and Series C Payment Agreement (collectively, the "Payment Agreements") setting forth or otherwise determining the mechanisms, terms, conditions, and procedures for submission of appropriation requests to assure repayment of the Series B Bonds and the Series C Bonds, and the amount, timing, and manner of payment of all amounts available from the State to the Pawtucket Redevelopment Agency for repayment of the Series B Bonds and the Series C Bonds. The Payment Agreements may include such covenants and undertakings of the State as the State Director of the Department of Administration and the Governor deem reasonable, including, without limitation, provisions requiring the Department of Administration and the Governor to include in each annual or supplemental proposed budget of revenues and appropriations submitted to the General Assembly for any fiscal year during which any Series B Bonds or Series C Bonds are outstanding the amount required for the payment of the projected annual debt service on the Series B Bonds and the Series C Bonds; and be it further

RESOLVED and ENACTED, That none of the Series A Bonds, the Series B Bonds or

the Series C Bonds, nor the Lease, nor the Payment Agreements shall constitute indebtedness of the State or any of its subdivisions or a debt for which the full faith and credit of the State or any of its subdivisions is pledged except to the extent that the State appropriates funds for the rentals securing the Series A Bonds, or appropriates funds for the Payment Agreements securing the Series B Bonds and the Series C Bonds; and be it further